Fitch Rates Oklahoma's $118MM ODFA Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following obligations of the state of Oklahoma, Oklahoma Development Finance Authority (ODFA), Oklahoma State System of Higher Education:

--$42.49 million master real property lease revenue bonds, tax-exempt series 2015B (subject to annual appropriation);

--$75.305 million master real property lease revenue bonds, federally taxable series 2015C (subject to annual appropriation).

The bonds are expected to sell via negotiation on or about July 28 and 29, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are limited special obligations of the ODFA secured by annual appropriations of the state of Oklahoma. The intended source of repayment on the obligations is the state board of regents for higher education on behalf of certain Oklahoma colleges and universities from their annual budget allocations.

KEY RATING DRIVERS

APPROPRIATION MECHANISM: The rating on the ODFA bonds, backed by Oklahoma's annual legislative appropriation pledge, is one notch below the state's 'AA+' general obligation (GO) bond rating. This reflects the state's general credit standing, sound lease structure, and statutory authorization for these types of bonds.

CONSERVATIVE FINANCIAL MECHANISMS: The state's financial operations benefit from the maintenance of separate rainy day (RDF; the constitutional reserve) and cash flow reserve funds and a policy of appropriating only 95% of expected revenues. The limited appropriation of revenues provides a cushion for the variability in the state's revenue sources, particularly the cyclical collections of severance tax revenue.

CONCENTRATED ECONOMIC BASE: Growth in the state's commodity-based economy, based on oil and natural gas production as well as various agricultural products, has slowed as a result of the current low oil price environment. While unemployment rates through May 2015 remained low and below national averages, the rate over the past two months has escalated and payrolls have declined as the natural resources slowdown has been incorporated.

MANAGEABLE LIABILITY POSITION: Debt levels are low, and tax-supported debt is amortized relatively quickly. Several rounds of pension reform have improved the state's long-term liability position, with the combined burden of debt and pensions slightly above the state median. Most new debt issuance is in the form of lease revenue bonds.

RATING SENSITIVITIES

The rating is sensitive to shifts in the state's GO rating to which it is linked.

CREDIT PROFILE

The ODFA bonds currently offered are secured by lease rental payments by the State Regents from state general fund revenues, subject to annual legislative appropriation. ODFA is one of the principal financing agencies of the state. Both the state constitution and enabling statutes provide for appropriation of lease payments in support of the master real property program. Additionally, the master leasing structure on behalf of the State Regents has been validated by the Oklahoma state supreme court.

The terms of the leases extend through the life of the bonds; the maximum lease term permitted by the ODFA is 30 years and lease payments are not abatable. The current offering will provide funding for four projects within the Oklahoma State University (OSU) system. Three of the projects occur on the OSU Stillwater campus;: a medical simulation facility and parking, construction of a new utility plant, and construction of a new parking facility. The fourth project is the construction and equipping of a new health services facility on the Oklahoma City campus of OSU.

All higher education appropriations to the State Regents are consolidated, with the State Regents authorized to allocate funds first to payment of lease rentals of each participating institution. The State Regents covenant to include a budget request for lease payments sufficient to pay debt service for these bonds. The fiscal 2016 operating fund appropriation for the State Regents is $963.4 million; a 3.5% reduction from the fiscal 2015 appropriation, enacted as part of state's plan to close an identified $611 million revenue shortfall in that fiscal year. Despite the appropriation reduction, Fitch believes the state remains committed to funding its higher education institutions.

The state's 'AA+' GO bond rating and Stable Outlook reflect low debt levels and disciplined financial policies. This includes an appropriation limit of 95% of certified general fund revenues, close monitoring of revenue results, and provisions to maintain separate RDF and cash reserve funds. The state expects to use a portion of the RDF to fund budgetary expenditures in fiscal 2016 in addition to other one-time actions, including fund sweeps. Despite these actions, Fitch believes financial operations continue to benefit from disciplined financial policies. Tax rate adjustments are limited by a supermajority requirement of the legislature or voter referendum to raise tax rates.

For additional information on the state of Oklahoma, please see 'Fitch Rates Oklahoma's $10MM ODFA Bonds 'AA'; Outlook Stable' dated June 8, 2015 and available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987547

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com